Buyers beware!

Analysis: India must outbid Japan, China for new LNG supply
By Jo Winterbottom and Nidhi Verma
NEW DELHI | Fri May 20, 2011 8:16am EDT

(Reuters) – India’s liquefied natural gas (LNG) imports will soar in the next decade to fuel its expanding economy, pitting the Asian giant against China and Japan for supplies as its domestic gas output struggles and overland delivery remains a pipe dream. India’s trillion-dollar economy is already the world’s eighth-largest importer of LNG, and those imports could rise as much as five-fold in the next decade.

India will have to hurry to secure the product it needs in the face of competition from Asian rivals China and nuclear-nervous Japan.

“The rapid increase in LNG demand from Japan will limit the ability of emerging markets such as India to source LNG,” said Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch.

The extra supplies are most likely to come from top LNG exporter Qatar, which already supplies India on long-term contracts and last year boosted capacity, and Australia, where capacity is undergoing rapid expansion, experts said.

With the cost of already pricey Australian LNG projects rising, holding off on securing long-term supply deals could end up costing Indian buyers.

Australian LNG projects scheduled to come online in 2015 or earlier have already reached at least preliminary long-term deals with buyers for their LNG.

While buyers often complain of the link with expensive oil in long-term Asian LNG contracts, India will have no choice but to sign up quickly if it wants to avoid being piped to supply by Japan and China.

Indian buyers have already had to compete with and outbid Japan for Qatar’s spot LNG cargoes. Japanese companies have been forced to boost imports to fire gas plants after shutting down nuclear power generation capacity in the wake of the shattering earthquake and tsunami this year.

Japanese buying was likely to tighten global LNG fundamentals and support prices for years, analysts said. “For many years Indian companies have held back from signing long-term contracts, hoping to get a better price for LNG. But in retrospect, this strategy is going to prove costly,” said Natalie Bravo, energy analyst at consultancy PFC Energy.

Signing long-term deals now would ensure more profitable operations for LNG importers planning to build expensive import facilities than if they waited, said Amitava Sengupta, the former head of finance at top Indian importer Petronet. “Indian companies should definitely go for mid-term 10-15 years LNG contracts,” he said.

LNG DEMAND With galloping growth of around eight percent a year and gas increasingly attractive against carbon-heavy coal and oil, India could need twice as much gas as it consumes now by 2020.

“Gas demand in India is expected to double by the end of the decade and LNG will have to supply the majority of that incremental demand,” said PFC’s Bravo.

LNG demand could rise as high as 50 million tones per year (tpy) in around 10 years, said consultancy Bain & Co. That would be about five times more than imports of 8.86 million tones in the year to March 31, 2011.

The rising needs of India’s power generation sector would propel the growth, said Christophe de Mahieu, director at Bain.

“We expect electricity demand to continue to grow. And the energy mix is favoring gas,” he said.

Consultancy Wood Mackenzie are more conservative- but still see LNG imports nearly tripling by 2020.

“Long term we see LNG demand increasing quite significantly … We see imports of 25-26 million tones in 2020,” Wood Mackenzie analyst Tim Welton said.

Competition for supplies is likely to be intense. Japan could bump up LNG imports by 7 to 8 million tones from 70 million tones of LNG in 2010 to fire gas power plants to compensate for lost nuclear-power capacity.

China’s imports are also expected to rise around five-fold to 46 million tones by 2020 from just over 9 million tones of LNG in 2010.

DOMESTIC SUPPLIES

GAIL (GAIL.NS), the country’s biggest gas transmission firm, estimates India’s total gas demand will surge to as much as 500 million cubic meters per day (mmcmd) in the next 10 years from 225 mmcmd.

Petronet LNG (PLNG.NS), India’s biggest LNG importer, thinks demand may touch 380-400 mmcmd in five years, while Ernst & Young say the shortfall in gas supplies could be 130-140 mmcmd by 2020. The gulf between forecast domestic demand and supply is widening. Hopes of a hefty contribution to meet demand from home-grown supplies dimmed earlier this year when Reliance Industries (RELI.NS) admitted production was slipping at its D6 field, India’s second-biggest gas producer after Mumbai High.

Lacklustre domestic exploration results give little reason to expect a turnaround at home. Geopolitical hurdles to pipeline supplies through fractious neighbors like Iran, Pakistan and Afghanistan have made LNG the only serious source of supplies.

To cope with the rising imports, India plans to spend billions to boost the capacity of LNG import terminals to 26 million tpy from 13.7 million tpy. Existing terminals are operated by India’s largest LNG importer Petronet and global major Royal Dutch Shell RDS.L.

India’s pipeline network would need an overhaul and expansion to get the gas to market that would require investment of up to 350 billion rupees ($7.8 billion) in India’s pipeline network, B.C. Tripathi, chairman of India’s biggest pipeline operator GAIL, told Reuters.

The network would need to grow to over 20,000 kilometers (km) of pipeline by 2020 from about 11,000 km, Tripathi said.

To ensure long-term supply and infrastructure investment, India’s gas pricing structure needs an overhaul, analysts said.

The bulk of Indian gas is sold at a base price of $4.2 per million British thermal units (mmBtu). The price would need to rise to at least $8-$10 mmBtu, Tripathi said.

India’s falling output is prioritized to fertilizer and power companies designated by the government, in a bid to curb state subsidy bills for core sectors.